OECD Sovereign Borrowing Outlook

Each year, the OECD circulates a survey on the borrowing needs of member countries. The responses are included in the OECD Sovereign Borrowing Outlook, an annual publication looking at trends and developments associated with sovereign borrowing requirements and debt levels, from the perspective of public debt managers. The Outlook provides data and information on borrowing needs and funding policies for the OECD area and other country groupings. Its coverage includes gross borrowing requirements, net borrowing requirements, central government marketable debt, funding strategies and instruments and distribution channels.

Each year, the OECD circulates a survey on the borrowing needs of member countries. The responses are incorporated in the OECD Sovereign Borrowing Outlook to provide regular updates of trends and developments associated with sovereign borrowing requirements and debt levels from the perspective of public debt managers. The Outlook makes a policy distinction between funding strategy and borrowing requirements. The central government marketable gross borrowing needs, or requirements, are calculated on the basis of budget deficits and redemptions. The funding strategy entails decisions on how borrowing needs are going to be financed using different instruments (e.g. long-term, short-term, nominal, indexed, etc.) and distribution channels.

Accordingly, the OECD Sovereign Borrowing Outlook provides data and information on borrowing needs and funding policies for the OECD area and country groupings, including gross borrowing requirements, net borrowing requirements, central government marketable debt, funding strategies and instruments and distribution channels.

Each year, the OECD’s Bond Market and Public Debt Management Unit circulates a survey on the borrowing needs of member governments. The responses are incorporated into the OECD Sovereign Borrowing Outlook to provide regular updates of trends and developments associated with sovereign borrowing requirements, funding strategies, market infrastructure and debt levels from the perspective of public debt managers. The Outlook makes a policy distinction between funding strategy and borrowing requirements. The central government marketable gross borrowing needs for the OECD area are calculated based on budget deficits and redemptions using a standard methodology. The funding strategy entails decisions on how these borrowing needs are financed using different instruments (e.g. long-term, short-term, nominal, indexed) and on which distribution channels (e.g. auctions, tap, syndication) are being used.

The OECD Sovereign Borrowing Outlook 2014 indicates that the combined gross borrowing needs of OECD governments seem to have peaked in 2012. Nonetheless, although overall sovereign market stress in the OECD area seems to have subsided somewhat, the borrowing environment for governments continues to be shaped by fairly high gross borrowing needs in conjunction with, at times, complex market dynamics during periods of higher sovereign debt stress in some countries.

Government securities issuers are grappling with concerns about increased market and liquidity risks, higher long-term interest rates and obstacles to global economic growth. There are questions about when, how fast and how central banks will begin to exit from unconventional monetary policy (UMP) programmes. Issuance is complicated in countries where large public deficits and very high debt ratios have not begun to decline, since the huge legacy of public debt continues to expose governments to potential shifts in confidence when credible medium-term fiscal consolidation plans are not in place. There are concerns over legacy risks from incomplete financial sector reforms and the possible adverse impact on market liquidity of (pending) new regulations. In response, many debt management offices (DMOs) have had to adjust their issuance strategies and sales procedures. Some have also introduced new debt instruments, or are planning to do so.

Total OECD gross borrowing requirements are expected to have fallen slightly from USD 11 trillion in 2012 to USD 10.8 trillion in 2013 and are projected to drop to around USD 10.6 trillion in 2014. Net borrowing is estimated to fall to USD 1.5 trillion in 2014. However, debt ratios for the OECD area as a whole are expected to grow and general government debt for a group of OECD countries is even projected to surpass the World War II peak.Raising the required funds remains a challenge. Most OECD debt managers continue to rebalance debt portfolios by issuing more long-term instruments, and seeking to moderate bill issuance. Enhancing fiscal resilience encourages maintaining diverse nominal and variable rate instruments along the maturity spectrum.Long-term real and nominal rates, as well as volatility of benchmark yields, were very low as of early May 2013, but then US yields rose sharply after the Federal Reserve signalled possible tapering of bond purchases.

The borrowing environment for governments continues to be shaped by market dynamics punctuated by sudden shifts in investor sentiment and perceptions of risk associated with certain sovereigns. Complications for issuers are generated by the pressures of (perceived) increases in sovereign stress. In extreme cases, this can result in a loss of market access. In several countries, the toxic links between banks and (perceptions about) sovereign creditworthiness also played a role.Interactions between public debt management and monetary policy can be an important channel for changes in long-term rates in government securities markets. Moreover, the political stress surrounding the extension of the US debt ceiling increased uncertainty and created more challenging borrowing conditions.Lack of consensus on how to measure and price "sovereign risk" is a serious obstacle in assessing sovereign asset safety. This complicates assessing alleged structural shortages in the aggregate supply of safe public assets. There is no decisive evidence of a lasting, structural shortage in the aggregate supply of safe sovereign assets.

Sovereign debt management offices need to deal with the challenges of changes in unconventional monetary policy; a tightening of fiscal policy; and market dynamics associated with the various exit paths from Quantitative Easing (QE).The complications generated by the increase in global volatility and long-term rates associated with confusion about the timing of the QE exit and tapering by the US Federal Reserve, constitute additional challenges for government issuers. This global volatility-cum-yield shock provides arguments for assessing carefully the potential impact of exit strategies and procedures on debt management and sovereign borrowing decisions.The challenges for debt managers during the early stages of the monetary and fiscal exit strategy are framed against the question that bedevils almost every government: how to continue to raise smoothly new funds at a reasonable cost, while managing rollover risk and the risks associated with a still growing debt stock.

Challenges for sovereign issuers are analysed, based on surveys of OECD debt managers, including the impact of direct bidding, syndication practices and the expected impact of (new) regulations. The way a more challenging issuance environment has affected the functioning of secondary government securities markets is also considered.Issuance conditions vary from issuers without full market access, to sovereigns suffering from the consequences of relatively unsuccessful auctions, to the fairly large group that had more or less unchanged issuance conditions.Many sovereign debt management offices adjusted their issuance procedures and introduced new types of instruments in response to a challenging issuance environment. Moreover, with the greater role of central banks (foreign and domestic) in government bond markets, maintaining a diversified investor base has become more difficult.Challenges also include the pressure on existing primary dealer systems and the impact of forthcoming regulations on primary markets.

This chapter summarises OECD members’ responses to the OECD survey on the direct bidding in auction systems. Bidders in sovereign debt auctions typically fall into one of three categories: Primary Dealers or authorised dealers, dealer clients or indirect bidders, and direct bidders. In particular, direct bidders include both large institutional bidders who submit competitive bids and smaller retail investors who submit non-competitive bids.The Borrowing Outlook investigates the participation of primary dealers and large institutional direct bidders under different auction mechanics, based on the responses from 22 OECD debt managers.The survey results are analysed from multiple perspectives.The prevalence of direct bidding under different auction formats.Potential benefits and disadvantages of allowing direct bidding in the auction process.Potential risks imposed by direct bidders.Impact of direct bidding on the bidding behaviour of other investors (mainly Primary Dealers), risk transfer costs, auction results, and secondary market liquidity.

Sovereign index-linked bond issuance has grown significantly since the early 1980s, with nearly $2.5 trillion USD in bonds now in issue. Index-linked bonds have become a widely accepted part of the set of instruments that sovereign debt managers use for funding purposes and so the question of how to assess their cost effectiveness relative to other financing options is of increasing importance. This paper sets out a methodology for conducting such an analysis, the rationale behind it and ways in which such an approach could be further developed.